Is “Transformation” Breeding Suspicion at PCAOB?

We’re hearing quite a bit lately about whistleblowers in the world of politics. Who’s ready for some whistleblowing in the controversial realm of . . . auditing?

Last week, The Wall Street Journal reported on a whistleblower complaint filed in May that painted the Public Company Accounting Oversight Board (PCAOB) in an unflattering light. The WSJ story included talk of “internal feuding and personnel issues,” as well as an allegation that chairman William Duhnke instilled a “sense of fear” throughout the agency.

The PCAOB has undoubtedly faced turmoil in recent years. In 2017, the Board found itself tied up in an audit inspection scheme involving Big Four accounting firm KPMG. In the wake of this revelation, the Securities and Exchange Commission (SEC), which oversees the Board, took decisive action. The Commission overhauled the Board, appointing five new members.

The makeover included installing Duhnke as chairman and, according to the WSJ report, he set about purging the top ranks of the agency after taking charge. He’s now facing questions about why it’s taking so long for the Board to fill vacancies in high-profile positions.

The PCAOB’s response to the WSJ story intimated that the charges in the whistleblower complaint were born from organizational inertia. Employees are balking at “a series of transformation initiatives to address systemic issues that exist across the organization,” in the words of a spokesperson.

A move last week to change a member of the Board contributed to the sense of upheaval around the audit watchdog. After naming cybersecurity expert Kathleen Hamm as one of the replacement Board members in late 2017, the SEC decided she wouldn’t receive a second term in the position. Instead, a White House aide, Rebekah Goshorn Jurata, will take Hamm’s place when Hamm’s term expires this month. Jurata previously served as an adviser to President Trump on financial services policy.

Amid all the changes, appointing Jurata added a whiff of politicization at what is supposed to be an apolitical agency. Yet, beneath the comings-and-goings of PCAOB personnel lies a noteworthy trend: a significant decline in audit inspection reports.

Data compiled from the Intelligize platform shows an annual decrease in PCAOB firm inspection reports for every year since 2014:

2014 – 258

2015 – 218

2016 – 215

2017 – 190

2018 – 153

Although the number of firm inspection reports held steady between 2015 and 2016, the total declined roughly 20% in every other year-over-year period.

PCAOB data shows the Board completed 82 firm inspection reports for 2019 through Oct. 22. At that rate, the firm inspection report total would hit 99 for a full 12-month period, a drop of approximately 35% from 2018.

It gets easier to accept personnel turnover in an organization when it leads to better performance. But the inspection report data, on its face, does not seem to help Duhnke and SEC Chair Jay Clayton as they draw fire from lawmakers over their management of the Board. Time will tell whether the Board will emerge from this period of organizational disruption a more effective and cohesive unit.